What is farmland worth?

If you operate farmland belonging to someone else, how much less cash rent would you have to pay if farm program payments were eliminated? Or if we ask the farmland owner the same question, how much less cash rent would you charge if government program payments were out of the picture?

First, don't fret that farm program payments are going to evaporate over the winter and you'll have a whole new farm economy in 2007! The question is posed as part of an exercise to determine farmland values, which to no one's surprise, are affected by farm program payments. Letâ€™s take a look at the potential answer.

Kansas State ag economists Terry Kastens and Kevin Dhuyvetter have published a pair of research reports on land values. The issue at hand is the question posed about how government payments and non-agricultural returns affect land values.

It is obvious that recent years have brought increases in land values due to increases in farm program payments. Without those, if farmland value was a result of farm income, Kastens and Dhuyvetter say an agricultural capitalization rate could be calculated by dividing cash rent by land value. They worked on that calculation, using rent to value ratios from 1951 to 1972 when land values were dominated by their worth as a commodity producing asset.

Now move ahead 30 years and apply those capitalization rates to current cash rents and calculate land values in a farming only economy. Kastens and Dhuyvetter label that as the "agricultural market value percentage" which indicates Corn Belt land values would be only a portion of what they are today:

Illinois: 54.5%

Indiana: 44.5%

Iowa: 60.5%

Kansas: 60.7%

Michigan: 19.4%

Minnesota: 50.4%

Missouri: 51.4%

Nebraska: 65.7%

North Dakota: 75.8%

Ohio: 43.4%

South Dakota: 55.6%

Wisconsin: 25.4%

The Kansas State ag economists then computed the ag-only value of land by multiplying the average land values in those respective states by that percentage, and coming up with the portion of 2006 agricultural crop land value attributed to government payments. This figure is "based off the average relationship between government payments and crop land cash rents over the 1951-2006 time period."

Illinois: 25.9%

Indiana: 25.1%

Iowa: 30.8%

Kansas: 49.8%

Michigan: 46.4%

Minnesota: 36%

Missouri: 29.3%

Nebraska: 38.9%

North Dakota: 53.9%

Ohio: 28.1%

South Dakota: 44.5%

Wisconsin: 33.9%

The final calculation multiplies those two percentages, and tells you how far cropland values might drop, without government payments. And where that winds up is an indication of the agricultural value of the land.